US Dollar Forecast 10-15% Higher from Trump Border Tax Proposal

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The new policy, if implemented, is forecast to have such a powerful effect on the value of the US Dollar exchange rate complex with significant gains being forecast by analysts at Morgan Stanley.

Border Adjust taxes imports and gives tax relief on exports and will raise a 20% tariff on imports and discount 20% from tax on exports, essentially amounting to a tax credit for exporters.

The policy has been put forward as a Republican House 'Blueprint', and since Republicans hold a majority in both Congress and the Senate, it is likely to see a relatively easy path to implementation.

Whilst some economists argue the Dollar will adjust significantly to offset the benefits of the policy, rising by an estimated 25%, Morgan Stanley do not agree.

“We don't expect a full exchange rate offset of the effects of border adjustment; the empirical breakdown of Purchasing Power Parity (both absolute and relative) in the short run, global supply chains and concerns about a World Trade Organization (WTO)-led response will limit full USD offset,” said Morgan Stanley.

Instead, the investment bank forecast an adjustment of a lesser but still substantial 10-15% degree instead.

“However, we still believe USD can rally 10-15% on a trade-weighted basis if border adjustment is implemented at the proposed 20% corporate tax rate,” said Morgan Stanley in their note.